The underlying principle of the new standard is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services.

A performance obligation is the basically promise to transfer goods or services to a customer.

In this step, the business needs to identify all the distinct performance obligations in an arrangement.

A good or service is defined as distinct if

the customer can benefit from it on their own, or with resources they already have, and

can be transferred independent of other performance obligations.

Any goods or services that can't be deemed distinct should be bundled together until they can be.
Performance obligations can also cover an obligations the customer might expect because of their history, which can make this step more complex.